Great blog posts about macroeconomics

Should the US Abolish the Corporate Tax?

The US Federal Corporate Tax Rate currently stands at 35%, the highest of any OECD nation. Given the sluggish jobs growth the US has faced since 2008, some pundits have proposed cutting, even abolishing our corporate tax. They argue that by doing so, companies could use the money they would otherwise pay in taxes to add jobs and increase wages. Moreover, companies could also use that money to invest in capital, as well as pay out to shareholders.

While decreasing taxation always makes for great sound bite, it comes at a cost. Namely, adding to an already substantial budget deficit and national debt, (even though in 2013, the corporate tax only made up 10% of federal revenue). However, some evidence suggests that abolishing the tax could be revenue neutral, or could possibly lead in increases in revenue. First, companies from around the world would look to set up shop within the US given that they would be paying no taxes here, which would lead to a large increase in jobs, with those workers paying taxes. Second, for workers that would be hired or get raises, they would then pay taxes on their earnings, as would shareholders if those profits were paid out to them.

One could argue that the amount of taxes paid would still decrease, since corporations pay a 35% rate while individuals, whether though wages or capital gains, pay rates far lower than that. However, just like with income taxes, there are plenty of loopholes that allow corporations to pay a much smaller rate. One such method is known as Transfer Pricing. Suppose the Ford Motor Company manufactures car parts in the US, and these parts have a declared value of $1 Million. Then suppose these parts were shipped to Mexico, where in a factory they are assembled into cars that have a declared value of $10 Million. Thus, Ford could report a US profit of $1 Million and only pay taxes on that, while there total profit was much higher. Apple has a similar type of system in place, and only paid 8.2% of its total profits for their corporate taxes last year. Taxes on wages start at 10%, and at the very least shareholders who pay long term capital gains rates pay 15%, both of which are higher rates than what Apple paid.

A study done by the Government Accountability Office found that from 1998 to 2005, 55% of US companies paid no taxes in at least one of those years. Moreover, of profitable Fortune 500 companies during the years 2008 to 2010, they paid an average tax rate of 18.5%, while 30 of these companies actually paid a negative tax rate. These loopholes often lead to the government favoring certain businesses over others, such as subsidies for big oil and renewable energy companies. In essence, the supposed benefit of having such a high tax rate, i.e. large government revenue, is not nearly as beneficial given that most corporations hide their money in other countries to avoid paying it.

In conclusion, the current corporate tax rate has led to companies attempting to exploit tax loopholes, when they could be investing that money in numerous other places within the US to grow their business, as well as the US economy. Granted the US would face pressure from the OECD not to change its rate, since those countries want to have their rates be lower relative to the US, in order to keep their businesses there. Furthermore, advocates for a corporate tax claim it’s not fair for individuals to pay all of America’s taxes. Yet in a time when the US economy is mediocre at best and job growth is nowhere near its pre-recession highs, many Americans would likely rather see a corporation’s money in their pockets rather than the government’s, especially if it doesn’t increase the national deficit.

2 thoughts on “Should the US Abolish the Corporate Tax?”

I believe your statistic when you state that the US has among the highest marginal corporate tax rates. But do you know how the US compares to other countries when we examine the actual average tax rates that US corporations pay? Just curious.